Growing a Franchise
Franchise attorney Ryan Whitfill explains how consistent profitability, strong operations and favorable contract terms can help owners attract buyers and maximize resale value.
A franchise's resale value depends on more than how much money it brings in each year. For owners wondering what increases franchise resale value, consistent profitability, strong operations and favorable contract terms can all make a difference in attracting buyers and securing a better selling price.
Financial performance is typically the first thing prospective buyers examine when evaluating a franchise. According to Ryan Whitfill, a partner at CM Law, gross revenue and net profits over the previous 12 to 24 months have the greatest influence on what a buyer is willing to pay.
A buyer will also want to see how the franchise has performed in previous years. Two businesses may be generating similar revenue today, but the one with a longer history of consistent profits is likely to have an advantage over one with fluctuating earnings.
"Buyers tend to be much more impressed with a franchised business that has shown itself to be profitable over time, from season to season and year to year," Whitfill said. "Of course, if a franchise has actually managed to consistently increase its gross revenue and/or profitability over several years, then buyers are even more willing to pay a premium in hopes of continuing that upward trend."
That makes good recordkeeping particularly important for anyone looking to sell a franchise. Buyers will want to review the business's financial history, and if the records are incomplete or difficult to follow, they may have trouble determining its value.
Financial performance isn't the only factor that affects a franchise's selling price. Employee retention also matters, since experienced workers can help keep operations running smoothly and labor costs under control. Frequent turnover may leave buyers questioning how well the business is managed and whether its operations are stable.
Lease terms can have an equally significant impact. Whitfill has seen franchises with respectable revenue and cash flow struggle to find buyers because their rent obligations were too high to support profitability. Negotiating reasonable lease terms early can help owners avoid that situation when they're ready to sell.
The franchise agreement itself also deserves attention. Whitfill identifies two frequently overlooked factors: transfer fees and the ability to pass negotiated contract provisions to a new owner.
Franchisees who negotiate lower transfer fees before signing their agreements may reduce the cost of a future sale. Similarly, owners who secure favorable contract terms should consider negotiating the right to transfer those benefits to a purchaser. Without that provision, the negotiated terms may lose their value when the business changes hands.
Owners hoping to sell within the next one to three years should begin preparing well before listing the business. Whitfill recommends maintaining accurate financial records, establishing consistent operating practices and continuing to invest in local marketing.
A franchise that's struggling to meet the franchisor's operating standards may have trouble attracting buyers. When owners stop following established procedures, the customer experience and sales can suffer. That decline can make the business harder to sell at a desirable price.
"The other factor that I've seen consistently among struggling franchisees trying to resell their businesses and failing to find buyers at an acceptable price is the failure to comply with the franchisor's system standards, advertising requirements and recommendations, and operating procedures," Whitfill said. "Cutting corners in these areas often results in poor services and products, lackluster customer experience and declining sales."
For owners evaluating what increases franchise resale value, these operational improvements can matter as much as revenue growth. A business with reliable financial records, manageable expenses and consistent operations gives prospective buyers more confidence in what they're purchasing.
Franchise owners can take several steps to improve their business's appeal to prospective buyers, even if they aren't planning to sell immediately.
Ultimately, maximizing franchise resale value requires preparation long before a buyer enters the picture. Owners who maintain strong financial performance and address potential obstacles early may be better positioned to negotiate a favorable sale when the time comes.
For more information on preparing to sell a franchise business, check out these related articles on 1851 Franchise:
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